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MAY 12, 2014 Water expands as it freezes, but the U.S. economy did the opposite in the recent brutal winter. A report last week on the nation’s trade deficit added more evidence to what most economists already have concluded: that the economy contracted significantly in the frigid first quarter of 2014. Last week came more substantiation, with the Department of Commerce reporting that the U.S. international trade deficit did not narrow in March nearly as much as was expected. That is in line with a gross domestic product (GDP) that grew only a few ticks above zero in the first three months of the year. Paige Wilhelm Senior Vice President Senior Portfolio Manager Federated Investment Counseling The general malaise of the early part of the year is fading more and more as other indicators are pointing to a strong recovery in the second quarter. The Organization for Economic Cooperation and Development last week forecast that the U.S. GDP will expand at 3.9 percent during the quarter and likely will continue a robust pace of recovery all year. The April numbers for the Institute for Supply Management’s services sector index improved to 55.2, up about 2 points from March. Employment metrics also improved, with a drop both in people receiving ongoing benefits and in weekly jobless benefits claims. But short rates continue to be frozen themselves. The 1- and 3-month Treasuries both moved up slightly to 0.025%. The 1- and 3-month London interbank offered rates (Libor) did not budge from 15 and 22 basis points, respectively. The Fed’s overnight fixed-rate reverse repo facility remained at 0.05%, and the overnight Treasury and mortgage-backed repo rates both traded at 0.05%, unchanged from last week. G40461-19 (5/14) Views are as of May 12, 2014, and are subject to change based on market conditions and other factors.